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Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty:Evidence from the G7 Economies

  • Olan T. Henry
  • Nilss Olekalns
  • Sandy Suardi

The Friedman-Ball hypothesis implies a link between the inflation rate and inflation uncertainty. In this paper we employ a new test for the joint null hypothesis of no dependence effects and no asymmetry in the G7 inflation volatility. The results show that higher inflationrates operate additively via the conditional variance of inflation to induce greater inflation uncertainty in the U.S., U.K. and Canada. In addition, positive inflationary shocks are found to generate greater inflation uncertainty than negative shocks of a similar magnitude in the U.K. and Canada.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-06/959.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 959.

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Length: 11 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:mlb:wpaper:959
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
Phone: +61 3 8344 5355
Fax: +61 3 8344 6899
Web page: http://www.economics.unimelb.edu.au
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  1. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  2. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  3. Davis, George K & Kanago, Bryce E, 2000. "The Level and Uncertainty of Inflation: Results from OECD Forecasts," Economic Inquiry, Western Economic Association International, vol. 38(1), pages 58-72, January.
  4. Daal, Elton & Naka, Atsuyuki & Sanchez, Benito, 2005. "Re-examining inflation and inflation uncertainty in developed and emerging countries," Economics Letters, Elsevier, vol. 89(2), pages 180-186, November.
  5. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  6. Sandy Suardi & O.T.Henry & N. Olekalns, . "Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics," MRG Discussion Paper Series 0206, School of Economics, University of Queensland, Australia.
  7. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
  8. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
  9. Laurence Ball, 1990. "Why Does High Inflation Raise Inflation Uncertainty?," NBER Working Papers 3224, National Bureau of Economic Research, Inc.
  10. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
  11. Hwang, Y., 2001. "Relationship between inflation rate and inflation uncertainty," Economics Letters, Elsevier, vol. 73(2), pages 179-186, November.
  12. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  13. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  14. Olan T. Henry & Sandy Suardi, 2004. "Testing for a Level Effect in Short-Term Interest Rates," Department of Economics - Working Papers Series 924, The University of Melbourne.
  15. Apergis, Nicholas, 2004. "Inflation, output growth, volatility and causality: evidence from panel data and the G7 countries," Economics Letters, Elsevier, vol. 83(2), pages 185-191, May.
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